Oil nears $107 as investors weigh bailout

September 22, 2008 8:16:48 AM PDT

By LOUISE WATT, Associated Press Writer

LONDON - September 22, 2008 --

Oil prices rose Monday as investors grappled with the possible impact on crude demand of a $700 billion U.S. proposal to buy bad mortgage debt. Light, sweet crude for October delivery on the New York Mercantile Exchange rose $2.33 to $106.88 a barrel by midafternoon in Europe after falling as low as $103.35 earlier in the day. On Friday, the contract rose $6.67 to settle at $104.55 on initial hopes the rescue plan would stabilize the U.S. financial system and help boost economic growth.

"There are a lot of issues to be filled in. It's an extraordinarily complex situation," said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney. "The market is digesting how the package will work and the implications for the U.S. economy."

U.S. congressional leaders endorsed the plan's main thrust, saying passage might occur in a matter of days. But they also want independent oversight, protections for homeowners and constraints on excessive executive compensation, House Speaker Nancy Pelosi said Sunday.

Treasury Secretary Henry Paulson pushed lawmakers, who received the package on Saturday, to approve the proposal as soon as possible.

The Federal Reserve also announced late Sunday that it granted a request by investment banks Goldman Sachs and Morgan Stanley to change their status to bank holding companies, a move that will allow the two institutions to open commercial banking subsidiaries, greatly bolstering their resources.

Traders were also watching news from Nigeria, where the country's main militant group in the southern oil region Sunday declared a unilateral cease-fire, ending the worst spate of militant attacks in years.

The Movement for the Emancipation of the Niger Delta said it was ceasing hostilities immediately after appeals from elders and politicians in the region. Three years of attacks have cut Nigeria's oil production from 2.5 million barrels per day to around 1.5 million barrels.

The group warned it would launch another spate of attacks if the military raided one of the group's base camps.

Moore said OPEC's decision earlier this month to cut production by 520,000 barrels a day and output shutdowns and damage to oil installations caused by Hurricane Ike and Gustav would have influenced investors more if not for the U.S. financial turmoil.

"The cease-fire (in Nigeria) should be slightly bearish," Moore said. "Recent supply-side news, which has been pushed to the background by other developments, has been poor."